Here’s an interesting thing that I learned from Jeff Rubin’s book on the price of oil. As you may have noticed, oil prices rose to record levels last year and then crashed, only to begin their slow rise again. As the price of a barrel of crude has gone up, so demand has fallen accordingly in the developed countries. Here’s the UK and US oil consumption between 2004 and 2009, in millions of barrels a day:
The pattern is similar across all the OECD countries – demand destruction in the face of rising costs. However, not everyone is cutting back on their oil use. Oil-producing countries are using more and more. That’s understandable, since it’s theirs, but take a look at China and India’s oil consumption – both net importers, yet seemingly undeterred by the oil price:
How are Chinese and Indian oil users able to keep up with rising prices? There are a couple of reasons. One is that they have nationalised oil companies. These companies sole purpose is to supply oil for their own markets, and they can operate whether they make a profit or not. Where other oil companies have scaled back investment because of the crashing price, they’ve pressed ahead and absorbed the loss.
Since the government is taking responsibility for the provision of oil, it also gets to set the price that it sells for. The Chinese and Indian economies both run with lower deficits than ours in the west, which means they can afford subsidize oil to their citizens. Chinese and Indian consumers do not pay the market rate for their fuel, and are protected from the crazy fluctuations in price.
I had always assumed that richer countries would be able to afford to use oil for longer, and that it would be developing countries that went without first, just as a matter of ability to pay. In fact, countries like the US and the UK are far more vulnerable to rising oil prices than China and India. When the next oil shock comes, it will be developed world consumers and rich world economies that take the hit.
I should hastily add that Africa will also be a big loser in the world of peak oil. The oil producing countries could experience something of a bonanza, if their wealth is shared. The rest will find they are priced out of the global oil market.
We’re still not acknowledging oil depletion, as last week’s IEA report showed, but it is slowly gearing up to be a major shaping force in the next century. Who gets to use oil and how are emerging questions in international relations. At the moment it looks like we’re destined to be among the biggest losers.